We consider a two-period market with persistent liquidity trading and risk averse privately informed investors who have a one period horizon. We study the drivers of asset prices in a two-period market where short-term, informed, competitive, risk-averse agents trade on account of private information and to accommodate liquidity supply, facing a persistent demand from liquidity traders. The crux of our argument revolves around a particular type of inference effect from the information reflected by prices that arises when liquidity traders’ positions are correlated across trading dates. This week I talked about how the uptrend is to be the focus of trading positions until a down trend is actually confirmed via price and volume action.


Following the bigger underlying trend of the market along with the big money will keep you on the right side of the market more times than not.  My trading strategy which is now programmed into my trading system clearly tells me the current market trend, entry signals, profit taking, stop adjustments and exit prices. Creating a proven trading strategy which works in all market conditions and having it programmed to do 95% of the analysis for you keep my trading emotions in check, saves me time and money and keeps things simple which is the key for long term success.
With persistence, prices reflect average expectations about fundamentals and liquidity trading.
Indeed, short term trading is at the base of Keynes’ dismal view of financial markets.


We find that when liquidity trading is persistent there is strategic complementarity in the use of private information and provide sufficient conditions for it to be strong enough to generate multiple and stable equilibria which can be ranked in terms of price informativeness, liquidity, and volatility; this allows us to establish the limits of the beauty contest analogy for financial markets, and deliver sharp predictions on asset pricing which are consistent with the received empirical evidence (including noted anomalies).



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Comments

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    17.08.2014

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    17.08.2014

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    17.08.2014